Residential Property and Equities

Our Views on Residential Property and Equities

A common investment debate is residential property versus listed equities (shares).

Over certain periods of time residential property will outperform equities and vice versa but in the long run they are correlated.  We believe they are generally correlated because ultimately residential property values are determined by wealth and income levels and the best proxy for wealth and income levels is the equities market.

To help decide whether residential property or equities (or both) are right for you we have compiled a list of some of their  differences.

Differences between Residential Property and Equities 

• Equity transaction costs are considerably less than property:
• Equities have no stamp duty; and
• Equities brokerage is between 0.20% and 1.1%
• Property stamp duty, legals and agent selling costs total around 5% (Buy & Sell).
• Property Yields (Rents) are considerably lower than equities (Dividends).  Resi­dential Property on average yields around 3% and stocks on average yield about 5-7% (including tax credits).

• Historically Residential Property has lower volatility levels than equities.

• Property is illiquid compared to equities.

• Land Tax is applicable if a property investor holds excessive land.

• Equities offer easy diversification. Often a purchase of residential property causes an asset allocation overweight.

• Unless more than one property is owned there is little diversification of income. i.e. one tenant

• Residential Properties can be negatively geared.  Although shares can be too, this has less of an effect because of their higher yield.

• Residential Property is easier to gear and there are no margin calls with property.

• Capital Gains on your Principal Place of Residence are tax-free.  A common investment strategy is for people to use all their funds in the family home with the view of selling it a tax-free profit.

• It is possible to add value to your property yourself.

• Putting the volatility of equities aside they are very low maintenance compared to properties.

Other Considerations 

• Many Australians’ incomes are property related.  These include architects, builders, carpenters, plumber etc.  Often people involved in the property indus­try are comfortable with property. However this investment approach can create a double exposure.

• Too often people’s wealth has been made from property and when they retire these funds are then invested in the stock market in an attempt to capture greater yields.

• If someone bought real estate with view of selling it there is less pressure to get the timing right as once property peaks it generally does not fall away quickly.

• Downsizing the family home or selling the holiday house is easier said than done. After years of memories and enjoyment from use of a property, families are often emotionally attached.